Australia has always believed that it doesn’t have to choose between its economic relationship with China and its defense alliance with the United States. But 2018 is already shaping up to be the year of the hard choice.

It would be convenient for Australia if it was able to maintain its balancing act, but a confluence of global factors has stripped away the fiction that it can separate the economic benefits it gets from China and its post-World War II position as one of America’s closest strategic allies.

There is a lot at stake, including potentially Australia’s ongoing prosperity.
China is clearly not happy with Australia’s adherence to the US alliance and if it follows through on veiled threats to boycott Australian exports and limit investment, Canberra’s loyalty to Washington could come at the expense of significant economic pain.

China’s hawkish Global Times newspaper, widely viewed as a mouthpiece for the ruling Communist Party, spared no niceties in an op-ed last week that warned Australia against “interference” in the South China Sea (SCS) territorial disputes.

Australia was “kissing up” to the US and risked “poisoning” its relations with China, which could “adopt strong countermeasures which will seriously impact Australian economic development.” Australia hasn’t taken a position on SCS spats, but has said it favors “freedom of navigation” in the area, echoing the US’ position.

China is Australia’s biggest trading partner, taking around a third of Australia’s exports. The two countries signed a free trade agreement (FTA) which came into effect at the end of 2015 and two-way trade now exceeds US$110 billion a year.

Chinese students comprise 38% of foreign students in Australia and prop up the university sector with their fees, bringing in US$18 billion per year.

The number of Chinese tourists is also booming. In 2005, 4.9% of foreign visitors to Australia were Chinese, a number which had risen to 13% by 2016. Chinese investors are key players in commercial and residential property markets, and are major investors in sectors such as agriculture and mining.

So when Australia congratulates itself on avoiding a recession for the last 30 years, it owes a major vote of thanks to China.

Despite this, Australia’s position on China is often schizophrenic. While the business and financial community continue to see China as Australia’s future, the defense and intelligence establishment in Canberra take a different view.

They see China as manipulating its global networks, including via the Chinese diaspora in Australia, in support of its global ambitions which are at odds with Australia’s traditional alliance with the US.

From these agencies comes innuendo about Chinese “interference” in Australia, a country which has for years hosted one of the most significant US surveillance facilities at Pine Gap in the Northern Territory.

A recent ban imposed on foreign donations to Australian political parties was squarely aimed at China, and friendships with Chinese donors cost a rising star of the opposition Labor Party, Sam Dasyari, his job in December.

Driven by fear of espionage and cyber-intelligence, successive Australian governments have blocked Chinese telecommunication giant Huawei from participating in the rollout of the country’s National Broadband Network.

In December, Canberra was also poised to kill a deal for Huawei Marine Networks to lay a 4,000-kilometer submarine cable from Sydney to the Solomon Islands.

Even Prime Minister Malcolm Turnbull, who as Communications Minister was expected to overturn the Huawei ban, referred to China as a “frenemy” in comments at a public dinner last year.

Such paranoia about Chinese telecommunication companies does not extend to New Zealand, where Huawei has been a big player in new national infrastructure or in the United Kingdom, where the company is a big player in rolling out 4G wireless networks and fixed rural phone connections.

Meanwhile, Australia has spent more than US$10 billion on weapons and military equipment from the US in the last four years, according to a recent Australian National Audit Office analysis.

With Australia set to spend around US$150 billion on defense in the next decade, with big outlays earmarked to build a next generation navy and air force, that figure can be expected to rise as it further integrates into the US military supply chain with projects like the J-35 Strike Fighter.

American foreign policy, however, is fast changing under US President Donald Trump. As the US appears to shrink from the region, including through its withdrawal from the Trans-Pacific Partnership trade pact, it is creating a vacuum which poses a major dilemma for Australia.

Does Australia fill that vacuum as a local enforcer of the US alliance and forge stronger alliances with other countries such as Japan and South Korea to counterbalance Chinese influence? Or does it accept China’s increased power in the world and recalibrate 70 years of foreign policy accordingly?

The fragmentation of late 20th century geopolitics is reconfiguring the world, and as a mid-ranking nation Australia is yet to find its new place.

Perhaps the only upside to this dilemma is that the US appears to be moving away from any direct confrontation with China in the Pacific as Trump looks to forge alliances against North Korea.

If US-China tensions are heightened, including by allegations that China is not acting genuine in its stated intention to isolate North Korea, it would quickly bring the polarity of Australian policy into sharp focus.

The inconsistencies and contradictions, including in strategic areas, are already apparent. While Huawei is banned from major national infrastructure contracts, its handsets have been approved for use by top defense officials and diplomats, and several thousand have been distributed.

When a Chinese company, Landbridge Group, secured a 99-year lease on the strategic Port of Darwin in 2015, top US defense officials said they were “stunned” by the decision. Critics at the time contended it gave China a “front row seat” to spy on joint US-Australian naval operations.

Australian universities have received government grants to work on collaborative research with Chinese companies on technologies which could have military applications. The University of Adelaide, for example, is working with the Beijing Institute of Aeronautical Materials, a company which is a part of the Aviation Industry Corporation of China.

All of this shows that Australia’s new hardline on China is and will inevitably be compromised by burgeoning economic relations. While the economic threats from China may simply be posturing at a tense juncture, they have called out and exposed the unresolved contradiction at the heart of Australia’s 21st century identity.